No matter how much markets fluctuate or how much interest rates rise and fall, homeownership remains an important part of the American dream for many. Approximately 66% of Americans own their own home.
Achieving that dream, whether purchasing your first home, upgrading, or downsizing requires planning, discipline, and careful decision-making. One of the most important decisions when buying a new home is financing a mortgage.
Even if you have an established relationship with a bank, you should shop with several lenders to find out what rates and terms they’ll offer you. Your income-to-debt ratio will figure prominently as will your FICO score, amount of down payment, and the monthly payment you can afford.
Once you know you’re qualified and what rate and term you can receive, you should calculate the difference between a fixed-rate mortgage and an adjustable-rate mortgage, (ARM). This is an important decision and should be considered carefully.
Adjustable-Rate Mortgage
If you look only at the initial monthly payments on an adjustable-rate mortgage it might seem like the smarter choice by offering more savings in the long run, but that will end up depending on how much interest rates will fluctuate. Is the ARM worth the risk if rates rise significantly? If there’s a chance that you might have to move for a job change, promotion, or expanding family within say five years, the risk may be worth it.
When making your decision as to what type of mortgage is best for your particular situation, you will want to consider your tolerance for risk and your plans for the future.
Fixed-Rate Mortgage
A fixed-rate mortgage offers the security of knowing what your payment will be each month for as long as you have the loan. This can be valuable for budgeting and controlling expenses. A fixed-rate mortgage can also reduce the stress of worrying about interest rate volatility.
If the predictability of a fixed-rate mortgage appeals to you, and if your income allows, you may want to consider a 15-year mortgage rather than the more traditional 30-year term.
This option still offers the benefit of a fixed monthly payment while also building equity more quickly and being able to pay off the loan completely years sooner.
Making Your Choice
Understanding the difference between a fixed-rate mortgage and an adjustable-rate mortgage is an important decision where your personal situation needs to be factored in. Your One Financial Services advisor is always here to review your options and help guide you toward a decision that works best for your financial future.